Tuesday, 2 October 2012

What You Should Know About the Supreme Court Judgement on Auctions

On 27th September 2010 a Supreme Court(SC) bench comprising of 5 judges pronounced its judgement on a presidential reference filed by the government to seek clarity on the decision of SC in 2G case. It should be recalled that 2G case decision was pronounced by SC in Feb 2010 in which all 122 licences which were granted by government in a first come first serve allocation process were cancelled since the process was found to be illegal.

In the 2G judgement the SC had mentioned that
"The exercise undertaken by the officers of the DoT between September, 2007 and March 2008, under the leadership of the then Minister of C&IT was wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality. The material produced before the Court shows that the Minister of C&IT wanted to favour some companies at the cost of the Public Exchequer.".
The court had also observed the following
"In our view, a duly publicised auction conducted fairly and impartially is perhaps the best method for discharging this burden and the methods like first-come-first-served when used for alienation of natural resources/public property are likely to be misused by unscrupulous people who are only interested in garnering maximum financial benefit and have no respect for the constitutional ethos and values. In other words, while transferring or alienating the natural resources, the State is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate in the process."

The stricture issued by the court left the government in fix on two fonts one, how to cancel the licenses it had granted to the private parties without a backlash from the foreign government and foreign industry, and second this judgement had in effect put the government in spot with all it previous allocation of natural resources where the process followed was not necessarily transparent and might have resulted in private parties benefitting at the cost of the nation.  It tried to first seek a review of the 2nd Feb Judgement in the SC but when it was questioned by the Judge whether it really was seeking a review for the directive to allocate 2G licenses. The government finding that 2G is perhaps a lost cause withdrew this petition.

Later it filed a presidential reference under article 143(1) of the constitution which is used to seek clarity from the SC "on a question of law which has arisen or likely to arise". Essentially this article is used by the government to clarify any doubt it has on a question of constitutional law and it seeks SC's direct opinion on it in order to formulate its future course of action. The reference that was filed by the government cited the various processes followed in past for granting licences for telecommunication since 1994 and asked 8 question. Question number 1 to 5 dealt with whether auction can be the only process for allocation of  natural resources and question number 6 to 8 dealt with whether the telecom licenses granted in past which did not follow auction should be cancelled and can no telecom licenses be granted in future without auction.
When this reference came before the court it invited petitioners of the 2G case, representatives of Indian industry (FICCI & CII), the government of India and the government of the States to present their arguments.

The petitioners of 2G case argued that this presidential reference was used to by pass the 2G judgement and if the government wanted a review of the judgement they should follow the due process rather than use article 143(1) which according to them is used only when a question of doubt over law has arisen. They argued that the petition is not maintainable and government's intention was malafide.

Soli Sorabji argued that  "the Reference as framed is of an omnibus nature, seeking answers on hypothetical and vague questions, and therefore, must not be answered. if the present Reference is entertained, it would pave the way for the Executive to circumvent or negate the effect of inconvenient judgments, like the decision in the 2G Case, which would not only set a dangerous and unhealthy precedent, but would also be clearly contrary to the ratio of the decision in Cauvery II"
Prashant Bhushan alleged that "the language in which the Reference is couched, exhibits mala fides on the part of the Executive."

The attorney general Vahanvati on behalf of the government presented that the government had accepted the 2G judgement, and the process of auction for the quashed licences was underway. He argued that "WHEREAS while the GoI is implementing the directions set out in the Judgment at paragraph 81 and proceeding with a fresh grant of licences and allocation of spectrum by auction, the GoI is seeking a limited review of the Judgment to the extent it impacts generally the method for allocation of national resources by the State."

In its judgement the Supreme Court first looked at whether the presidential reference was maintainable, and then it had to decide which of the questions it should reply too. The court after reviewing the arguments came to the conclusion that presidential reference was maintainable as long as the decision with respect to allocation of spectrum licenses is untouched. It mentioned "We are, therefore, of the view that as long as the decision with respect to the allocation of spectrum licenses is untouched, this Court is within its jurisdiction to evaluate and clarify the ratio of  the  judgment in the 2G Case."

SC next looked at whether the 2G judgement had in anyway made it mandatory to use auction as the only mode of allocation of natural resources. After going though all the arguments the court in its conclusion mentioned that the stricture for grant of telecom licenses via auction in 2G judgement was limited to spectrum and did not apply to all natural resources. It said "Thus, having come to the conclusion that the 2G Case does not deal with modes of allocation for natural resources, other than spectrum, we shall now proceed to answer the first question of the Reference pertaining to other natural resources, as the question subsumes the essence of the entire reference, particularly the set of first five questions."

While replying to the set of first five questions the court looked at whether as per article 14 (fundamental right to equality before the law) and article 39(b) (directive principal of state policy which states that distribution of resources should be for "common good") of the constitution there was any mandate that auction should be the only(just) policy to be followed.

After going through the arguments the court held that auction is not a constitution mandate to be followed in all cases of disposal of natural  resources. The court mentioned "The disposal of natural resources is a facet of the use and distribution of such resources. Article 39(b) mandates that the ownership and control of natural resources should be so distributed so as to best subserve the common good. ... Distribution has broad contours and cannot be limited to meaning only one method i.e. auction. It envisages all such methods available for distribution/allocation of natural resources which ultimately subserve the “common good”."

The court also mentioned  that "the submission that the mandate of Article 14 is that any disposal of a natural resource for commercial use must be for revenue maximization, and thus by auction, is based neither on law nor on logic. There is no constitutional imperative in the matter of economic
policies- Article 14 does not pre-define any economic policy as a constitutional mandate. Even the mandate of 39(b) imposes no restrictions on the means adopted to subserve the public good and uses the broad term ‘distribution’, suggesting that the methodology of distribution is not fixed. Economic logic establishes that alienation/allocation of natural resources to the highest bidder may not necessarily be the only way to subserve the common good,and at times, may run counter to public good. Hence, it needs little emphasis that disposal of all natural resources through auctions is clearly not a constitutional mandate."

The court went on the clarify that it can however test the legality of such decision of distribution of natural resources based on the fairness principal. The judgement said "When questioned, the Courts are entitled to analyse the legal validity of different means of distribution and give a constitutional answer as to which methods are ultra vires and intra vires the provisions of the Constitution. Nevertheless, it cannot and will not compare which policy is fairer than the other, but, if a policy or law is patently unfair to the extent that it falls foul of the fairness requirement of Article 14 of the Constitution, the Court would not hesitate in striking it down."

The court did express an opinion that auction is a more preferable method but not a constitutional mandate. The judgement read "In our opinion, auction despite being a more preferable method of alienation/allotment of natural resources, cannot be held to be a constitutional requirement or limitation for alienation of all natural resources and therefore, every method other than auction cannot be struck down as ultra-vires the constitutional mandate."

The court concluded that "our answer to the first set of five questions is that auctions are not the only permissible method fordisposal of all natural resources across all sectors and in all circumstances. As regards the remaining questions, we feel that answer to these questions would have a direct bearing on the mode of alienation of Spectrum and therefore, in light of the statement by the learned Attorney General that the Government is not questioning the correctness of judgment in the 2G Case, we respectfully decline to answer these questions."

Justice Jagdish Singh Khekhar provided a detailed explanation of the courts judgement in a separate judgement in which he agreed with the judgement but never the less provided some clarifications he thought were necessary along with several examples. He mentioned that "there can be no doubt about the conclusion recorded in the “main opinion” that auction which is just one of the several price recovery mechanisms, cannot be held to be the only constitutionally recognized method for alienation of natural resources. That should not be understood to mean, that it can never be a valid method for disposal of natural resources ". He concluded that "no part of the natural resource can be dissipated as a matter of largess, charity, donation or endowment, for private exploitation.  Each bit of natural resource expended must bring back a reciprocal consideration.  The consideration may be in the nature of earning revenue or may be to 'best subserve the common good'.  It may well be the amalgam of the two.  There cannot be a dissipation of material resources free of cost or at a consideration lower than their actual worth.  One set of citizens cannot prosper at the cost of another set of citizens, for that would not be fair or reasonable."

That was quite a lot of information that I have lifted ad verbatim from the Judgment. But I feel it was necessary for me to let the reader know what was exactly mentioned in the judgement, to best inform them of the aspects which in my view were important. Now the question before us is whether this judgement means that auctions are dead? Is GOI off the hook on Coalgate? Will GOI now be able to proceed with future allocation of telecom spectrum without auction? Will we never see a transparent process of distribution of natural resources? Will we continue to suffer because of crony capitalism?

I am not student of law let alone a constitutional expert but I can read English and this judgement is in plain English. My understanding is that this judgement does not really sound a death knell to transparency in general or auction in particular. It merely states that governments can make policy decision while staying withing the ambit of article 14 and article 39(b) of the constitution. It goes on to say that auction is a preferable way though not a constitution mandate. It also gave a stricture to the government that it can strike down a patently unfair policy or law.  It is also important to note that for spectrum allocation the court refused to answer the questions raised by government. Thus this judgement needs to be read into as applicable to cases other than telecom spectrum. As far as telecom spectrum goes the defining judgement was the 2G case and continues to stay unchallenged. It requires the government to follow the policy of auction.

The judgment may give a false impression to some governments ministers that they can get away with arbitrary allocation and they have given statements taking a dig at CAG for 'activism'. But it in no way lets the government of the hook as far as corruption and crony capitalism is concerned. I read a great explanation of how this judgement needs to be read in a Hindu editorial 'Auctions are dead, Long live auctions'.

No comments:

Post a Comment